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Revisiting Economic and Trade Integration in the Arab Region: New Prospects for Reaping Untapped Potential

Ahmed Ghoneim [aghoneim@gmx.de], 21 Jun 2017

Economic integration in the Arab region has passed through several stages in its history since the first endeavor of the Treaty for Joint Defense and Economic Cooperation in 1950 and ending with the establishment of the Pan Arab Free Trade Area (PAFTA) in 1997 that was fully implemented by 2005. Over the period 2000-2015, the percentage of Arab intra-regional exports to their total exports has been steadily increasing from 5.1% in 2000 up to 10.8% in 2015[1].

This trend is considered relatively modest compared to other regional trade agreements around the globe and is partially attributed to the similar production and exports’ structure of Arab countries (high concentration of oil and limited intra-industry trade).At the same time, political and institutional factors have played a major role in preventing the Arab countries from reaping the potential of intraregional trade. Ranging from political conflicts to proliferation of non-tariff barriers (NTBs), and weak institutions governing the process of integration, the Arab economic integration remained modest. This blog aims to identify the potential of reviving Arab economic integration from a new perspective.

The academic debate on Arab economic and trade integration – exploring whether Arab intraregional trade is below potential or has leveled at it - and which takes into consideration the economic fundamentals of Arab countries, can be grouped into two main camps.

The first is mainly based on gravity models[2] and argue that intraregional trade has reached its potential, whereas the second is based on intra-industry trade indicators[3] and argue that Arab intraregional trade has been performing well but that there is still a room for enhancing integration. In this blog, I argue that the reality lies somewhere in between and depends on the set of conditions that the analytical framework takes into consideration, among which are the changing variables that result in different simulation scenarios. For example, strengthening the institutions that govern the intraregional trade and specifically those associated with dispute settlement, and monitoring and controlling NTBs are key elements to ensure the success of deepening the process of Arab integration. Moreover, the potential for enhancing trade in services remains untapped and the recent conclusion of negotiations on the regional trade in services in 2017 sets the overall framework, but additional steps are still needed to ensure its success.

Moreover, the potential of Arab economic integration emerges from the complementarity nature of the economies in terms of capital and labor movements[4]. Hence, focusing only on merchandise trade is constraining Arab countries from exploiting the full potential of their integration if viewed from a broader perspective. However, the current political economy of the Arab region, especially after 2011 has complicated the political environment where identity politics are playing even a bigger role in affecting the nature of relationships among countries. This situation might further delay labor integration making it unattainable in the short and medium terms. This is not the case for the movement of capital since historically this was never considered a constraint among Arab countries.

To enhance Arab trade integration, specific prerequisites are needed. These include changing the institutional setup governing Arab economic integration, introducing domestic reforms, and deepening the nature of this integration. The new areas of focus should include enhancing trade in services, engagement in regional value chains, upgrading the system of rules of origin to allow for effective cumulation, and enhancing cooperation on joint infrastructure projects.

First, the institutional setup of the League of Arab States and its Economic and Social Council, which has been overseeing the Arab economic integration by acting as an inter-governmental organization can be reformed such that it becomes more of a supranational organization with the mandate to mainly serve regional interest. The model of European Commission and how it handles trade policy inside the EU serves as an insightful model. It safeguards the regional interest and has the discretionary power to resolve the conflicts that arise due to competing national interests among the EU countries. Moreover, the Arab region need for a more functional mechanism for monitoring and addressing non-tariff barriers and for settling disputes.

Second, domestic reforms are also key and mainly include trade facilitation and port and customs management systems. There is an urgent need to modernize such systems to integrate information and communication technology as part of their management. The trading costs among Arab countries should be lowered significantly to reduce the anti-Arab export bias among Arab countries which is mainly due to the proliferation of non-tariff barriers and high border costs[5].

Third, Arab countries have moved a step forward in their customs union with the finalization of a unified customs draft law in 2014. However, what is needed for Arab countries to enhance their integration is not to move from PAFTA to a customs union but rather to equally focus on deepening their trade relations. In this regard, there is an urgent need to harmonize policies, standards, and regulations. The adoption of different national standards and their discretionary enforcement has hindered merchandise trade. The establishment of the Arab Accreditation Cooperation (ARAC) [6] in 2011, and which was recognized by League of Arab States in 2015, is a step in the right direction, but it requires stronger political commitment. Harmonization of policies can follow at a later stage, but those directly associated with trade as production subsidies must be better coordinated among Arab countries.

As for priority areas of focus, it is important at this stage to adopt a realist approach and move away from the conventional arguments calling for labor integration given the regional political dynamics.

I suggest focusing on enhancing regional integration in services by building on the successful conclusion of the Beirut Round of negotiations which lasted from 2003 till 2017. The potential for enhancing trade in services at the regional level remains un-reaped and the expected political resistance is likely to be less when compared to merchandise trade due to the nature of trade in services which does not entail tariff revenue loss or dismissing local labor as in the case of merchandise trade. That said - a lot of regulatory cooperation is needed.

Finally, to enhance regional merchandise trade there is a need to conceptualize trade in a new context based mainly on the effective cumulation of rules of origin where more incentives are given to Arab exporters to become engaged in regional value chains. Regional value chains that can be an integral part of global value chains based on the more convenient cumulation of origin rules can help boost investment and trade in the Arab region. Additionally, enhancing cooperation on joint infrastructure projects, especially associated with transport and ports by expanding their scope of the current projects is also instrumental. Such areas of focus do not only enhance trade and economic integration but have as well a positive spillover effect on preventing regional conflicts.

To conclude, the potential for enhancing Arab economic and trade integration remains untapped and can be further deepened, provided that a new more realist framework that takes into consideration economic realities, political dynamics and institutional set-ups is adopted.

[1] Calculated by the author for the 18 PAFTA member countries from Comtrade Database, United Nations, [Online]. Available online: https://comtrade.un.org/db/

[4] See for example: Fischer, Stanley (1993), “Prospects for Regional Integration in the Middle East”, in de Melo, Jaime and Arvind Panagariya (eds.), New Dimensions in Regional Integration, Cambridge: Center for Economic Policy Research (CEPR) and Cambridge University Press.

[5] For example, the port handling fees remain high in Arab countries and almost three times the fees in neighboring non-Arab ports. See Hoekman, Bernard (2016), “Intra-Regional Trade: Potential Catalyst for Growth in the Middle East”, MEI Policy Paper 2016-1, Washington D.C.: Middle East Institute, [Online]. Available at http://www.mei.edu/sites/default/files/publications/Hoekman_PDF%20%282%29.pdf

[6] ARAC was launched on June 12, 2011 to be the Arab Cooperation Accreditation Body for the planning, development and coordination of the accreditation infrastructure in the Arab region (22 Arab countries) to support inter/intra Arab trade, improve the competitiveness, provide trust in Arab goods and services and protect health and safety of the public and the environment. Following the 95th Ministerial Economic and Social Council meeting of the League of Arab States, held on 19th February 2015 in LAS headquarters, in Cairo, Egypt, the Ministerial Economic and Social Council has recognized ARAC as one of the main pillars of the Pan Arab quality infrastructure in supporting intra-regional trade and the Arab Customs Union requirements. See http://www.arac-accreditation.org/uploads/6444-ARAC%20Brochure_Eng.pdf

Ahmed Ghoneim is a professor of economics in the Faculty of Economics and Political Science at Cairo University. He is a research fellow at the Economic Research Forum for Arab Countries (ERF) in Egypt, and at the Center for Social and Economic Research (CASE) in Poland.

The views expressed here are solely those of the author in his/her private capacity and do not in any way represent the views of neither the Arab Development Portal nor the United Nations Development Programme.

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